The Long-Term Economic To-Do List

Beyond the urgent post-election to-dos there is another checklist that will have a significant impact on American prosperity over the next decade. David Wessel reports on The News Hub. Photo:Agence France-Presse/Getty Images

By

David Wessel

Updated Nov. 8, 2012 10:44 a.m. ET

The items marked "urgent" on the president's economic to-do list are overwhelming. The temptation must be to start at the top and work down: Avert the fiscal cliff, fill pending cabinet vacancies, reach out to China's new leaders, cajole Europe into avoiding economic suicide.

Last August, President Obama and Congress put the U.S. economy on course to go over a "fiscal cliff." With the 2012 presidential election decided, WSJ's David Wessel tells you everything you need to know about the "cliff" but were afraid to ask.

LPL Financial Chief Market Strategist Jeff Kleintop on what the election results mean for the economy and the markets, especially with the impending fiscal cliff on the horizon. Photo: Reuters.

President Obama will face a divided Congress, making the threat of that the U.S. will go over the fiscal cliff likely. University of Chicago economics professor Randall Kroszner discusses on Markets Hub. Plus, the re-election of Obama means he gets to nominate the next Federal Reserve Chief. Who might it be? Photo: AFP/GettyImages.

But after savoring his re-election, President Barack Obama would be wise to consider a few things that will matter to American prosperity over the next decade. With the global financial system melting down in 2009, he didn't have that luxury at the start of his first term. Now he does. Here are four items on the long-term to-do list.

The true fiscal fix

Steering away from the fiscal cliff is important. Not only would the abrupt across-the-board spending cuts and tax increases of the fiscal cliff push an already-weak economy into recession, going over the cliff would convince the public and financial markets that Washington truly is dysfunctional.

The budget deficit, for all the hue and cry, isn't today's economic problem. The U.S. government is borrowing more than $3 billion every weekday and paying the lowest interest rates in history. Today's problem is unemployment.

The deficit is tomorrow's problem: Spending on promised benefits will far exceed anticipated tax revenue even after the economy recovers. And this, Democrats and Republicans agree, is unsustainable. Doing something now that reduces the 2016 deficit is more important than reducing the 2013 deficit.

How the deficit is reduced matters, too. Federal Reserve Chairman Ben Bernanke has counseled avoiding too much austerity too fast, nurturing the fragile recovery and enacting laws now to reduce borrowing in the future.

Another thing: All government spending isn't created equal. Democrats sometimes talk as if all non-defense spending is great, Republicans as if it is all bad. Neither is correct, of course. Government spending ought to be focused on investments in human and physical capital that will pay off—which means spending less than projected on retirement and health benefits.

The U.S. has an acute employment problem. Roughly 3.6 million Americans have been without work for a year or more and are still looking. Almost one in five men between ages 25 and 54 doesn't have a job. Fiscal and monetary policy should be calibrated to get more of them working before they become permanently unemployable.

But the U.S. had a wage problem even before the Great Recession of 2007-2009. The typical employed man between 25 and 65, the one in the statistical middle, earned $40,081 in 2011, about 16% less than in 1999, adjusted for inflation. Women did better: The median woman with a job earned $30,061, up 4% from 1999.

Faster economic growth is a necessary but probably not sufficient condition to get wages rising again. As MIT economists David Autor and Frank Levy have documented, middle-wage jobs that can be easily automated or moved abroad are disappearing—and with them middle-class paychecks.

Mobility

During the presidential campaign, one candidate made an impassioned speech at Cleveland State University. "Upward mobility is the central promise of life in America," he said. "But right now, Americans' engines of upward mobility aren't working the way they should ... You know there's something wrong in our country when 40% of the children born to parents in the lowest fifth ... never know anything better."

That sounds like a liberal critique of American capitalism. But the speaker was Rep. Paul Ryan, the conservative Republican vice-presidential candidate, who was relying on a fact from some recent Brookings Institution number-crunching.

The next four years would be more productive if they began with an acknowledgment that the gap between winners and losers in the U.S. economy has been widening. Behind that change are reasons including market forces, the advance of technology, globalization and changing social mores. The distance between the penthouse and the ground floor is growing yet the escalators of mobility—such as education—haven't improved commensurately.

But that doesn't mean it can be ignored for four more years. "Our climate is changing," New York Mayor Michael Bloomberg wrote in his somewhat-grudging endorsement of Mr. Obama just days after a superstorm barreled into the Atlantic Coast. "And while the increase in extreme weather we have experienced in New York City and around the world may or may not be the result of it, the risk that it might be—given this week's devastation—should compel all elected leaders to take immediate action."

This will be hard for a political system that finds it difficult to look beyond the short term and the next election.

These issues have something thing in common. Even after Tuesday's voting, there is no consensus on how best to address them —on how to reduce the deficit without strangling the recovery, how to create more middle-class jobs and promote upward mobility, and how to respond to climate change.

Republicans and Democrats have different prescriptions, and the election didn't change that. Which leaves just two options: compromise or gridlock.

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